~ My thoughts in my words

Time to rethink offshoring?

The developed markets have started to realize that offshoring isn’t so lucrative after all in the long run.

In a McKinsey report on rethinking offshoring, analysts have pointed out that offshoring manufacture of basic utility products to the east may not be so lucrative as before. Rising crude prices are eating up on the buyer’s margin, and consequently companies need to rethink in order to stay put. Increased wages have only added to the pressures. Its time for companies to bring manufacturing on-shore or at least near-shore. Taking the US perspective, Mexico can act as a favored destination in the times to come.

What does this mean to the Asian tigers whose economies have seen a streak of development because of offshoring saga? The whole world is flooded with Chinese products. The competitive advantage of china lies in its low wages and developed infrastructure. If the wages go higher from here with transportation costs not helping, it might come to a stage when china would be reduced to a local manufacturing hub only (the local market is also huge, given its population).

India has never been known to be an epicenter of manufacturing, and is more focused towards services. With the internet connectivity getting cheaper, it might actually get better. The large English speaking population is taking their cause forward.

Interesting, Indian companies are now taking over the traditional near shore centers; represented by Reliance Energy, ONGC, Tata Motors…the list goes on.

India is also a big user of western products since the social milieu trusts western brands more than the local ones. At this stage, it gets increasingly important to rethink our strategies and lurch forward in terms of near and onshoring for products and offshoring for services.